May 12, 2022

Inflation and the  Supply curve 

A few thoughts on the markets :

Negatives :

A) Waited  to comment on the April inflation numbers. Higher  at 8.3 pct for the CPI than the forecasts at 8.1 pct. Core inflation also 0.2 pct higher. Inflation appears persistent and markets are disappointed.

B)Markets  fear that persistent  inflation will probably necessitate more interest rate increases and will create a recession risk. Growth stocks, as discussed, suffer more with interest rates increases. 

C) the problem is higher costs due to supply chain problems. The war in Ukraine, oil, materials and the important Chinese lockdowns due to Covid fears are weighting very negatively. Inflation and production are both negatively affected.

D) The best policy is to target the supply curve. Reduction of tariffs, taxes, release of oil reserves…few policy options available. 

E) By following restrictive monetary Demand  policies, production will decrease  even more. In 2020 we followed expansionary policies during the Covid crisis in the West but cannot doit now.

Possible positives :

A) The well known negatives appear priced in.Markets probably reflect the pessimistic scenario. Indeed “It gets too dark before dawn”!

B) Hopes are that a reduction in the severity in the Ukraine conflict and an improvement in the Chinese  lock down situation will lead to an easing of the supply bottlenecks and the inflation problems. The reduction of Demand will also probably help. 

Conclusion : The FED underestimated the inflation problem and was left  behind in the interest rate increases. In addition, We had a geopolitical shock by the problematic Russian leader.

Hope to be able to remain well invested for a sudden, strong, unpredictable recovery. Now we reduce risk in some accounts. 

Would wait patiently focusing on the long term !